Guest Post: The "Bloated" Bond Bubble

The Fiscal Cliff theater was great 'off Broadway' drama, but the real show for traders took center stage Sunday December 16th in Japan. The curtain went up for the newly elected Prime Minister of Japan as the star actor in the unfolding global fiat currency drama. In the last 90 days the US, EU and now Japan have announced "unlimited", "Uncapped" monetary policy with UK's soon to be bank of England Governor, Carney indicating he wants inflation & growth targeting also when he assumes the reins. The goal has been to get interest REAL interest rates as low as possible, and the expected duration to be as long as possible. Market have reacted to this strategic and obvious debasement by stampeding, relentlessly into the Bond Market and creating a disturbing potentially destabilizing bond bubble. However, remember, Financial Repression is at work here and US Bond Yields and Interest Rates must be further reduced. We presently expect the 10 Year US Treasury Bill to eventually break below 1% and Equities will fall on the re-pricing of credit and risk, earnings revenue and margin issues and slowing real global growth.

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. The one aim of these financiers is world control by the creation of inextinguishable debt.”~Henry Ford

“The new law will create inflation whenever the trusts want inflation. From now on depressions will be scientifically created.” (Congressman Charles A. Lindbergh, after the passage of the Federal Reserve act 1913.)

“Under the Federal Reserve Act, panics are scientifically created. The present panic is the first scientific one, worked out as we figure a mathematical equation.” (Congressman Charles A. Lindbergh, The Economic Pinch, 1921.)

The highest for of Sun Tzu's "Art of War" ever perpetrated on a population.

"War is all about deception."

"The best warriors never have to fight"

"If you find yourself in a war, end it quickly or you will BANKRUPT THE NATION."

The corollary being - anyone selling the nation on never ending war has the EXPRESS PURPOSE OF BANKRUPTING THE NATION!

“There is no instance of a country having benefited from prolonged warfare. ”

“Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment — that which they cannot anticipate.”

“When you surround an army, leave an outlet free. Do not press a desperate foe too hard.”(incrementalism... tick tock, tick tock on your liberties and wealth)

So..., he only hires Jews, 24/7. Doesn't even trust the Chicaga crowd anymore. The game is..., split the New York Jews from the Zionists? I'd rather try to fill an inside straight while gambling with Wookies, but no one ever claimed Barry was the sharpest knife in the drawer.

I wonder which insurance company will be the first to blow up with the continued flattening of the curve. They are already scrambling to raise cash, reduce benefits, and sell everything they can. Sooner or later one of them is going to blow up.

Just one little problem, inflation expectation have bifurcated away from bond yield, you push 30 years bond below inflation expectation for the 30 years and you get comex Silver market to blow up!! Ok I will lose a bit on my short treasuries but the pressure cooker on inflation will be unrenable.

manipulation of markets always failedin history, markets have wrenched centeal banks many times in history. The market participant as a whole have cornered bad central banks, not the other way around. Gravity always bring back flying objects to the ground as long as their speed is < 11km/s. I would not assume that Bernanke as such stellar speed of thought.

Just one little problem, inflation expectation have bifurcated away from bond yield, you push 30 years bond below inflation expectation for the 30 years and you get comex Silver market to blow up!! Ok I will lose a bit on my short treasuries but the pressure cooker on inflation will be unrenable.

Don't encourage me too much .... I inflate the number of my posts .... and .... the quality plummets ! Sort of a joke bubble dead cat bounce syndrome ! We'd all do Ponzi .... if we could get away with it !

Even they know those days are behind us in this monetary regime (regardless of rhetoric promoting the lie).

Besides, the singular goal is "gotta get mine" (your version was merely the means to that goal). All of that consumption pump priming only works when there's still unencumberd wealth to steal. After nearly 100 years of Fed issuance, anything they don't already own is pledged to one of their minion banks as collateral.

Like you stated, saturated debt.

Now, comes the next step, collecting all of the loot from its former owners.

Each time the Fed was printing you had a postive reaction on bonds because the Fed was printing while money market premium over Fed funds waswidening while inflation expectations were plunging and banks were weak = systemic fear

Now this not happening now so if the Fed prints while inflation expectation rise people will do what they did on Dec 12th when the journalist asked about monetization, market on Treasuries sunk. If Fed prints will inflation expectations rise, people dump their treasuries because they read "monetization" instead of systemic fear.

The US treasuries can not rally while the systemic fears are gone onbanks, and inflation expectations rise.

There is too much distinction made between stocks (shares) & bonds. As if stocks are somehow fundamentally different to bonds.

No, stocks are just a type of unsecured bond. You give the company your $ & in return the company undertakes to give you no guarantee of anything in return. Stocks are just the worst kind of junk bond.

Stocks, along with government, quasi-government, investment grade, junk etc etc bonds, also the the various derivatives, all comprise the 'money' market. All trade to one extent or another 'money good', or in a financial panic, don't trade at all - worthless.

The actions of government, through their central bank, is to put a bid under the 'money market'. They are increasingly making longer term bonds trade at par, that is, 'money'. They do this because the 'money market' is actually junk, including government bonds. Thus the $ is junk, since the value of a bankers obligation - the $ - is as valuable as its assets. You just don't know it, you are being scammed.

stocks are a residual claim after bonds. They do worse in maasive deflation, bonds can recover some value in bankruptcy proceedings, but stocks are better in hyperinflation,they plunge in real terms but benefit from from debt holder spoilation. If hyperinflation starts buy a company with very long date bonds with fixed coupon and huge leverage, there would a massive transfer from debt to equity.

If you'd been eyeing off that yacht based on your share portfolio in early 2007, you'd have suffered a hyperinflationary nightmare in 2008 if you hadn't sold. And looked like a chump. How many shares would it have taken you to buy that yacht in early 2007, as opposed to the end of 2008?

Stocks are part of the 'money market', a high & rising stock market means stocks are moving closer to 'money', like the price of a bond moving closer to par. Notice 'money', since the reality is the $ is junk, about as far from money as it is possible to be. The $ is the King of credit bubbles, not the King of Kings.

Stocks are better than bonds, but real deal is Hard Assets and commodities long and Short Treasuries, in hyperinflation, nominal rate move to the moon while way behind inflation while hard assets move up in relative terms to everything else (super transfer of wealth).

before TBTF, greenspan and bernanke puts, massive government intervention in mortgages, there used to be someting called the default rate; similarly credit ratings were a proxy for the probability of default.

sure investment grade bonds (down to BBB- @ S&P, Baa3 @ Moody's) had low probabilities of default, but you had the chance of losing most all your money in junk/high yield bonds

wind-ups were generally thought to have a 30% recovery for unsecured debt and 70% recovery for secured debt/loans) in "junk" bonds with ratings of BB, B, C and those in default of D.

Extra yield of 6-8% would cover you for the probability of default with some illiquidity premium and those large bid/offer spreads for these 5-10 year unsecured or three year secured bonds.

The implied default rate in markets has collapsed to just 2-3% with all this government and Fed manipulation.

The credit ratings (Ratings ssessment of the probability of default) haven't changed, neither has the amount recovered on default.

The key point is that, as you migrate up the credit rating scale, it matters less whether it is debt or equity. Once you are below investment grade, the spread compensates you for deafult.

A spread of 8% for junk, means that 1 in 12 companies go tits up. Zero value returned to equities. The bonds generally recover 30% of their nominal.

The market is now assuming default rates of 2-3% so a failure rate of just one in 50 or one in 33 companies fail.

Junk companies operate at the margin in the economy. You can make money out of these if the number that fail are compensated for the number that succeed by a margin of 12 or so (@6-8% default rate) or one fail per thirry or so (@3% default rate)

The disaster/"crap out" of the "system" occurs, post the correction to the fiscal deficit, with more bullshit money removed from the economy, when the default rate will return to 6-8% (one in 16 to one in 12 companies with junk status) failing.

Low spreads for junk, represents the misallocation of capital to crap, as a result of macro economic interference.

To say that bonds are the same as equities works only at investment grade, where spreads over govies compensate for bid/offer price spreads at the point of dealing plus the chance of ratings migration to lower quality and junk.

To say that bonds are the same as equities at the junk level (below investment grade) is misleading, naive and ignorant.

There is a rwason why junk/high yield is correlated with equities and why bonds are a prior claim on recoverable assets ahead of equities. It is the principle of subordination of rights that has been part of the financial markets since the 17th century.

A bubble that could pop with a disappointing post Fiscal Cliff debt ceiling resolution and consequential downgrade of the US debt.

1. The debt ceiling is theatrics. Nothing will happen.

2. The ratings agencies only downgraded before to fool the people into believing they are somehow objective. They may do it again, and we'll see the same thing: A brief sell-off and then a return to idiocy...

When talk turns to hyperinflation and what happens when, it just starts to interweave onto itself and make no real sense.

What does make sense is the source of all money says they are buying a particular piece of paper No Matter What. 85B of them per month.

All the other handwaving and moral hazard stuff and deep thinking into what it means conceptually may have some merit, at some point, in some way. But for now, the source of all money says they are buying a particular piece of paper no matter what.

That is a guaranteed bid. Hard to see how you lose money owning that piece of paper. Last year that as good for about 8%, with zero equity risk.

Yup if they buy no matter what while the 30 years inflation expecation goes to 2.75%, 3% I think other markets are going to look funny... An non Fed participants not only would stop buy the long bonds (see Bill Gross letter) but more ~evil~ market participant say guys like Jim Rogers, will keep shorting more and more and the plain long will dump. Inflation expectation will rise even further. That will make bond yield rise and Fed will be trapped into buying even more forcing making the other side very worried and dump more..,.... KAAAAABOOOOOOOMMM!

Declining paper gold has provided tailwind to bonds. However, when/if paper gold strengthens, bonds may face a tough time. Furthermore, irrespective of gold, technically bonds turned bearish in mid December 2012 as they broke a significant trend line. So the investors have to keep an eye on the BLV (long-term bond)/ term bond)/ GLD (gold) ratio as it is explained here:

MARKET THINKS Fed Prints because of deflation threat ==> FRONT RUN THE FED.

PRINTING WEHN INFLATION EXPECTATION RISE (12-12-2012 QE4)

MARKET THINKS Fed Prints because monetization ==> DUMP THE TREASURIES

The market has called the bluff of the Fed on Dec 12th 2012. Eitther the Fed stops printing soon and the long bonds are declining orderly, or the Fed keeps printing more while inflation expectation keep rising and then A LOT MORE DUMPING on bonds.

The Maya calendar was not 12-21-2012 but 12-12-12, the day when the treasuries are dumped while teh Fed prints even more = FATAL ERROR from the Fed. THIS WILL BE REMEMBERED AS THE POLICY MISTAKE FROM THE THIS FED AND HENCE THE SCRAMBLING A FEW WEEKS LATER!!!!

As with real estate, the primary symptom of the US Treasury bubble possibly entering a terminal stage is the rapid runup in 'hot money' holdings. You can count Carribbean banking centers, the UK, Luxembourg, Switzerland and Hong Kong all increasing holdings by 15-50% in the past year.

Suffice it to say, there is a hair trigger in place that could cause a snap-back in rates that will just blow the shit up--the shit being the remnants of the real economy.

And you know, our luck lately just hasn't been that fucking great. So no, it doesn't HAVE to happen...but it will, just because it will suck even worse. Therefore it will happen.

You know the funny thing is, there is actually one bond investment that would break the Curse of Japanification (zero real return, at best, across all major paper investment classes). That investment is, simply, to buy actual paper bonds in companies paying a decent, say 5% interest rate and....LOL....HOLD IT TO MATURITY.

I feel like crying....this simple thing that people used to do....now, get this.....it is virtually impossible to get an actual, paper bond certificate today. Just think of that. Pretty much all are bought at issue by filthy thieving global elite scum...er, sorry, large financial institutions....and only placed on the secondary markets in large lots for other large financial institutions.

dolph, apparently you don't understand the differnce between yield and price. You must be listening to those morons who keep touting the simple coupon as income and sole source of bond income, please don't fall for that commoner misbelief, I ofter hear "why would anyone buy a 10yr note at 1.75%, that is a small return with a lot of downside risk. unfortunately there is no downside risk to the bond, you will get both your principal back and you will earn 1.75% a year. There is reinvestment risk upon your coupon payment streams, however you must also consider the prospect of capital returns if the note rises in price or goes lower in yield to say 1%. This capital appreciation is never talked about on CNBC because they placate to equities and all the idiots out there. Don't be an idiot. There is no risk to buying treasuries, they will beat equities this decade as they did last decade. Interest Rates cannot go up, ever. Japan is just the beginning and we are next, we will have sub 1% 10yr yields just like them, Why? Because it does not take a genious to figure out that our Debt grows exponentially thus to afford future interest payments which is the only thing that matters, then the only thing to do is to debase currency and ZIRP to infinity it is a Black Hole that is the only way to define it, NO WAY OUT.

I have long thought that the following was a very fundamental principle of wealth management:
When the real interest rate (interest minus inflation) is below zero, buy real assets.
The US markets are so corrupted that I don't believe stocks are a viable option. It has gotten to the point that if you don't hold an asset closely it is not reasonable to believe you will have it when you want to realize whatever gains you may have made.

US bonds are in dire straits...but a crossover is happening, in my opinion. Crossover may be defined as the fact that US bonds which used to be 'risk free' are no longer having that status due to facts such as high debt, lower than AAA rating, political horseshit, high unemployment, low growth, financial suppression, socialised losses, rampant banker fraud et al...

On the other hand, bonds such as from Korea, Singapore, Philippines, Indonesia, Africa, China, India, Russia etc are increasingly coming out with USD denominated bonds. To establish their own yield curve and a deeper bond market besides accessing investors directly since banks are insolvent most places anyways.

In the past all these countries and their corporates had to give 300 to 500 bps above US Treasury yields.

However, with my crossover theory, all US corporates as well as European Govts and European corporates are paying same rates as Asian and Russian issuers. This was not possible just 5 years ago. Today, it is equal in terms of risk and hence the same yield being offered.

In 3-5 years from now, the yields in Asia and Russia and Abu Dhabis and Qatars of the world, who are all cash rich and low on debt, and have growing economies just like US and Europe were back in the 70's and 80's, will allow them to isse USD bonds at lower rates than in Spain, Greece, all of Europe and US corporates. US Govt bonds will hold, until it won't.

Once the yields on Asian, African and Russian issuers go below the US and European yields, my crossover theory wil hopefully be proven accurate. In many cases, even currently, there are examples, but this has to hold over a longer period of time.

Bonds are not fun in US and Europe but in rest of the world, which is still growing, they are not as bad because they generate high coupons of 4% to 6% p.a. and with lower risk in coming years, they will still keep rising and grant very decent capital appreciation. In evidence, just look at some of these bonds, all in USD, and issued in the last 6 months to 3 years, by non US corporate issuers, amazing profits, eh?:

All these countries or companies are not scary because they all have a mandate to grow, the GDP in their countries is rising, unemployment is not as dire, as say, 10 years ago, Govts have low debt, banks have for the most part not been fully bailed out in the true sense since most banks are Govt owned anyways, plus all these companies or countries have decent cash reserves. Having seen what has happened in US and Europe, I believe, they have actually cleaned up their act in the last 4-5 years and are stronger than ever before.